On the Horizon

Accounting for Financial Instruments—Credit Losses

The global financial crisis highlighted the need for more timely recognition of credit losses on loans and other financial instruments held by banks, lending institutions, and other public and private organizations.

The Board currently is considering a proposal that would introduce a “current expected credit loss” (CECL) model for held-to-maturity financial assets to replace today’s “incurred loss” impairment model that currently exists for debt instruments in Generally Accepted Accounting Principles (GAAP). The CECL model uses a single measurement objective. Under this model, expected credit losses would reflect management's current estimate of the contractual cash flows that it does not expect to collect, based on its assessment of credit risk as of the reporting date.

U.S. and global investors strongly prefer the CECL model over the current model because it would provide more useful information on an expected loss basis.
Feedback on the FASB proposal indicated that both U.S. and global investors strongly prefer the CECL model over the current model because it would provide more useful information on an expected loss basis.

The FASB conducted additional outreach with other stakeholders and performed additional analysis to consider the International Accounting Standards Board’s (IASB) model and other expected credit loss models that were recommended by other stakeholders, including the banking community. After extensive consideration, the FASB decided to continue with the CECL model.

The FASB is in the process of finalizing its redeliberations on disclosures, scope, transition, and effective date. The FASB plans to issue a final standard in the first half of 2015.

More information on the project can be found here.

Revenue Recognition Transition Resource Group Meeting on October 31


The second Revenue Recognition Transition Resource Group (TRG) meeting will take place on October 31, 2014.
The second Revenue Recognition Transition Resource Group (TRG) meeting will take place on October 31, 2014. During that meeting, TRG members will be asked to provide input on the following potential implementation issues identified by stakeholders:

Licenses


The TRG will discuss various questions related to the licenses implementation guidance including determining the nature of the license (for example, right to access intellectual property versus right to use intellectual property).

Customer Options for Additional Goods and Services


If, in a contract, an organization grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into the contract. The TRG will discuss interpretations of how to determine if an option provides a material right.

Distinct in the Context of the Contract


Determining whether a good or service is distinct impacts the number of performance obligations accounted for under the new revenue model. TRG members will discuss interpretations of how to determine whether a good or service is distinct in the context of the contract.

Enforceable Rights and Terminations


The new revenue standard includes discussion of enforceable rights and terminations in various sections of the guidance. The TRG members will discuss the interrelation of these topics with select steps of the model.

Contract Assets and Contract Liabilities


When either party to a contract has performed, an organization will present the contract in the statement of financial position as a contract asset or a contract liability. The TRG members will discuss various aspects of this topic including interpretations and netting of contract balances.

The TRG also plans to meet on January 26, 2015. More details about the TRG are on the FASB website.

EITF’s Pushdown Accounting Project


Current Generally Accepted Accounting Principles (GAAP) offer limited guidance for determining when an acquired company or not-for-profit organization that is preparing its separate financial statements can mirror the acquirer’s reporting of net assets. Use of an acquirer’s basis by an acquired organization to prepare its separate financial statements is known as pushdown accounting.

While there is pushdown accounting guidance for SEC registrants, stakeholders believe the guidance is complex and diversity in practice exists among all organizations.
While there is pushdown accounting guidance for SEC registrants, stakeholders told the FASB that the guidance is complex and diversity in practice exists among all organizations, including registrants.

The FASB’s Emerging Issues Task Force (EITF) has addressed this issue and recently reached a consensus that was subsequently ratified by the FASB. The consensus will provide guidance on whether and at what threshold an acquired organization can apply pushdown accounting in its separate financial statements.

The guidance, which will apply to public and private companies and not-for-profit organizations, provides an acquired organization with an option to apply pushdown accounting in its separate financial statements when an acquirer obtains control of the acquired organization.

Disclosures (similar to the disclosures provided by an acquirer under Topic 805, Business Combinations) that enable users of financial statements to evaluate the effect of pushdown accounting are also required.

The consensus will be issued as an Accounting Standards Update by the end of 2014.

More information on the EITF’s pushdown accounting project is available on the FASB website.